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Under the provisions of Indian Penal Code, frauds have been classified as follows:
While verifying loans and advances, the auditor has to take cognisance of certain indicators,
which may lead to irregular accounts / frauds.
• The branch has 1 or 2 major borrowers constituting more than 50% to 75% of the total
advances of the branch, to whom the branch goes out of its way to give continuous
overlimits or withdrawals against uncleared effects or does not pursue recovery of overdue
bills or stock statements are not received in time and yet drawing power limit is continued
or account is not renewed on due date or adhoc limits are not cleared and yet facility is
continued, etc. etc.
• While verifying CC a/c, OD a/c and bills a/c, the following observations are made
− account remains continuously overdrawn;
− the account has been granted continuous TOL by the branch – for 20 to 25 days
every month moreover, such TOLs have been granted by the Branch Manager, at
times, without having the power to do so;
− the 12 month’s turnover in the account does not commensurate with the sale and
purchase shown in 12 monthly stock statements or the statement of accounts
submitted;
− the realisation of bills purchased / bills discounted is not received on the due date and
subsequently the same are cleared by debit to the borrower’s CC / OD a/c;
− as soon as the above bills are cleared, fresh bills are purchased / discounted;
− the facility has not been renewed on the due date and the reason given is that the
borrower has not submitted the necessary papers;
− all overdue CC limits, OD limits, unrealised bills, unrealised interest are bundled
together and the borrower is granted WCTL – Working Capital Term Loan to avoid the
account becoming NPA. Such bullet loan is an indicator that the account is having
problems;
− for certain accounts, when papers are asked for, the branch is unduly slow in
producing the same or makes a plea that the same have been sent to some authority
and hence is unavailable at the branch;
− in case of certain accounts, the Branch Manager pleads not to put any adverse
remark in the report and that he shall get it rectified after the audit is over;
− in certain cases, the branch just does not produce the papers, pleading that the same
are not traceable;
• While verifying monthly / quarterly stock statements submitted, the following observations
are made
− generally stock statements are not submitted on time;
− the itemwise details of stock is not given and instead lumpsum figures are shown
without quantitative details;
− there is heavy “sundry creditors” indicating unpaid stock, but the said amount has not
been deducted from the stock value, before determining the DP – drawing power limit
of the borrower;
− the stock statement contains details of stock, which have actually financed by the
branch under LC limit or Packing Credit limit or some other limits;
− there is a huge difference in the closing stock shown in the stock statement of 31st
March, 2011 and the audited / unaudited accounts submitted subsequently or better
still, the borrower does not submit the stock statement of March or the same is
untraceable in the branch;
− the stock statement reflects an unusually high amount of “stock in transit” every
month, which does not commensurate with the monthly purchases or the monthly
turnover in the accounts;
− though mandated, the Branch has not obtained the “stock audit report”;
the Branch Manager states that subsequently he has visited the unit and
everything is rectified and regularised;
− the stock inspection done by the branch is superfluous and does not record the details
of the stock verified – a few direct indepth questions to the branch staff, who went for
the concerned stock inspection would reveal the quality of the inspection done;
• While verifying monthly / quarterly book debts statements submitted, the following
observations are made
− book debts due for more than 90 days are not segregated, though the same is
mandated in the Sanction letter;
− a comparison of last 10-12 month’s statement reveals that there are a number of book
debts, which probably are being shown for more than 8-10 months and may be bad
debts or recovered, but not deducted from the statement;
• A comprehensive 10-12 month’s analysis of monthly sales, purchase and stock as shown
in the stock statements, the book debts, the turnover in the accounts and the audited
financial statements may reveal that the stock statements submitted every month are
highly inflated.
− in immovable property loans, the branch has not obtained “search report” of the
property from the Registrar’s office, or the adverse comments in such report have
been ignored;
− the branch has not obtained NOC from the builder / society or such NOC has been
personally brought by the borrower to the branch instead of the same being directly
obtained by the branch from the builder / society;
− in case of loans to limited companies, details of previous charges have not been
obtained or if any adverse observations have been made, the same are ignored – for
eg. the report shows that the borrower has borrowed from other banks without the
knowledge / permission of the existing banker, old charges which were supposed to
have been cleared have not been done indicating that old loans are still outstanding;
− the branch has filed a suit against the borrower to recover the amount;
• Genco Bank C N Shah Group loans of upto Rs 52 crore of the total Rs 100 crore
advances. The group was willing to pay Rs 12.90 crore by December 2003, while the
remaining loans to be paid in 15 years. State co-operation and protocol minister
Vadibhai Patel wrote a letter to the Registrar of Co-operatives and the bank
administrator, asking them to accept this proposal
• Rupee Coop Bank - 11 irregularities identified by the apex bank during its inspection
of the co-operative bank’s affairs.
1. Bank’s gross Non-Performing Assets (NPA) formed 34.2% of total loans and
advances outstanding. Also, it had not correctly followed RBI guidelines on
• Panchmahal District Central Coop Bank (PDCB) - in June, 2003 sitting MLAs of
Gujarat were accused of misappropriating Rs 128 crores from this Godhra-based
bank. PDCB’s new managing committee has filed the complaint. The committee had
superseded the board of directors after the bank withdrew from the RBI’s clearing
house citing “liquidity” crisis as reason. Altogether, 29 people were of giving loans to
farmers on basis of fake documents. There is a slew of former MPs and MLAs who
have been named in the complaint Among others who make up the list are the district
registrar of co-operatives for Panchmahals, present and former managers of some of
the branches of PDCB, and officials of some of the village credit societies. The crisis
has been so severe that PDCB was forced to even withdraw their deposits with the
Gujarat State Co-operative Bank, which is essential for maintaining the statutory
liquidity ratio (SLR). The bank had a deposit base of only Rs.192 crore, but made
advances worth Rs 372 crore. Most of the misappropriated funds aggregating to R.s
128 crores was lent to 2 co-operative credit societies run by local MLAs.
• Samta Sahakari Bank - All the 21 directors of the ailing Samta Sahakari Bank have
been booked for defrauding the bank of over Rs 145 crore. The fraud came to light
after a flying squad from the cooperatives department audited its accounts between
March 30, 1997, and October 30, 2007. It is alleged that the bank's officers and
directors took huge commissions and favours for sanctioning unsecured loans to
many clients, most of which have gone bad. The directors had also taken huge loans
from the bank and defaulted on repayment. Some of the bank's directors were also
the key accused in the Nagpur Mahila Sahakari Bank case. The bad loans of the
Mahila Sahakari Bank had led to the intervention of Reserve Bank of India (RBI),
which placed the bank under moratorium. Some of the big business groups of the
Revenue Leakage-Frauds-17.11.12.docx Page 6 of 10
Revenue Leakage & Frauds by Ismail B. Sonawalla November, 2012
region and 15 others had been sanctioned unsecured loans to the tune of over Rs 100
crores.
• Home Loan Frauds - RBI has warned banks to strictly adhere to due diligence
procedures while disbursing housing loans. The following observations have been
made by RBI :
Investments
• The G-secs fraud of Rs.500 crores by Home Trade Ltd., a broking firm – 25
urban co-op banks & 4 dist. Central Co-op. Banks involved; 12 banks duped
• Home Trade also duped the Seamen's Provident Fund to the tune of Rs. 94 crores.
Several co-operative banks involved in the latest scam on account for fraudulent
deals placed directly with brokerage firms for investment in gilts. SEBI suspended
Home Trade over transactions that the RBI had termed `fraudulent.' Several UCBs in
Maharashtra and Gujarat which struck deals through brokers are now stuck with
illiquid stocks or have paid high prices for their securities
• Economic Offences Wing of Mumbai police case against Home Trade Ltd for
defrauding Raghuvanshi Co-operative Bank Ltd - Rs 6 crores, Osmanabad bank - Rs
30 crores, Wardha District Co-operative Bank - Rs 25 crores, Shree Satguru Jangli
Maharaj Co-op. Bank - not received gilts worth Rs 27 crores, Nagpur District Central
Co-operative Bank - Rs. 124 crores
• Replica of the 1992-securities Harshad Mehta’s scam. While Mehta used banker's
receipts to have an easy access to huge funds, this time, Home Trade Ltd., used
government securities (G-Secs) to avail itself of money.
• Scams more or less follow the same pattern — Ketan Parekh — Madhavpura
Mercantile Co-operative Bank (MMCB) scam in 2001 and is also an instance of
diversion of funds from the banking sector to the stock market.
• In 1994, RBI put in place a delivery versus payment (DVP) system under the Public
Debt Office (PDO) of the central bank. This is linked to Subsidiary General Ledger
(SGL) accounts in banks. At the end of the day, the buyer or seller has to fill the SGL
form and deliver it to the RBI. Now with the inception of Clearing Corporation of India
Ltd. (CCIL), the SGL form filling procedure no longer exists. However, co-op banks
are out of the purview of DVP system. RBI could have brought in co-op. banks under
the ambit of DVP system when the MMCB scam broke-out, but RBI waited for a
scam to surface in order to initiate fire-fighting measures. Further, under no
circumstances can the RBI allow a broker to act as a principal (a broker can only act
as an intermediary between principals and cannot assume the role of a principal). In
this case, Home Trade acted as a principal. Another issue is that many co-op. banks
do not have Treasury divisions, which trade in securities. How the RBI allowed any
bank without a Treasury division to operate in a debt market is a question that can be
raised. In the case of co-op. banks, all the decisions of investment in securities are
taken by the board of directors which are elected rather than a full fledged Treasury
that would otherwise be run by professionals. The role of Primary Dealers (PDs) is
also in focus at this point of time. PDs are interested only in large dealings rather
than small deals of co-operatives. Moreover, PDs are interested in running a book to
make proprietary trading profits rather than disseminating debt to and developing the
non-wholesale debt market for which they were set up.
Fixed Assets
• The Primary Teachers’ Co-op. Bank, Nashik – June, 1998 - the Bank established in
1939 and with 12 branches and 7,303 members in Nashik, the bank was defrauded by
various methods including furnishing of bogus names and papers for loans for various
schemes. Among the depositors defrauded are hawkers, shopkeepers and housewives,
who at regular intervals gave the bank's agents a portion of their money to be deposited
in a small savings scheme. However, instead of depositing the money so collected, the
agents merely pocketed the collection. When the depositors approached the bank at the
conclusion of the financial year in April, they were told that there was no money to pay
them. The then directors and staff not only siphoned off money but also went on a
recruitment drive, employing their family members and relatives. The then chief
accountant and eight directors also helped themselves to the depositors' funds. The
bank's plea to the District Central Cooperative Bank for a loan to return money of the
yearly small saving depositors has been turned down, since against a share of Rs 36
lacs with the district bank, they have already taken a Rs 3.5-crore loan in the past.
• S. K. Patil Co-op. Bank, Kurundwad, Kolhapur - Fraud of Rs.22 crores - the bank's
founder S K Patil and his son Sanjay Patil took loan of 22 crores on the names of 32 co-
operative societies. Some of the societies and their directors are unknown. Actually,
most of the societies and their directors are only on paper. Recently the S K Patil Bank
liquidated and the liquidator found that the 32 societies have taken loans of Rs 22 crores
from the bank. Then the liquidator issued notice to the directors of the societies about
loan. The directors were shocked because they had never taken any loan from the S K
Patil Bank.
• A creative fraud - Viniv Inc Souharda Credit Society has a deposit of Rs. 90.00 lacs
only and out of this, Rs. 85 lacs have been disbursed as loans. All these loans are
secured loans and the recovery rate of the Cooperative is 98%. It was registered in July,
2003, at the Office of the Registrar of Cooperatives, under the Karnataka Souharda
Sahakari Act.
The said financial fraud has happened inside the OTHER Viniv Inc firms namely Vinv Inc
Investments and Viniv Inc Foundation. Both these institutions do not come under the
purview of the Cooperative Act. Though this being the case, upon the request made by
Karnataka State Federal Cooperative Limited, the Registrar of Cooperatives ordered an
Enquiry into the business of this said co-operative, as it became an issue of public
debate.
90% of the deposits given by the people was deposited in these external institutions and
not Viniv Inc Co-operative. People deposited their money in other institutions in the name
of Viniv Inc and NOT in Viniv Inc Souharda Cooperative. Viniv Inc Investments and Viniv
Inc Foundation issued cheques to the depositors bearing the names of State Bank of
Travancore and Vyshya Bank. All these firms were operating from a single building and
the sign board of the Viniv Inc Co-operative was huge among all of them People might
have been misled by this too. Viniv Inc Investments invested money in stock market. It
has been alleged that this firm was an associate of one India Bull, a stock brokering
company. Viniv Inc Foundation collected money in the name of donations. These
institutions took deposits / donations and to pay the interest on these amounts, these
institutions issued cheques. People deposited these cheques with their membership
accounts in the Viniv Inc Cooperative in order to get it encashed. They got their money
as and when these cheques were realised.
General
• Bihar State Cooperative Marketing Union Ltd – The Managing Director of this Union
was also secretary of the department of cooperatives as also the registrar
(cooperatives). During 1986-87, he was allegedly party to violating norms in placing
orders for supply of fertilisers without even inviting tenders. An FIR was lodged and
chargesheets filed in the court of Patna CJM. He moved the Patna HC which quashed
the FIR. However, the Bihar government went in appeal to the SC which set aside the
HC order.
Revenue Leakage
Income
• Computerized and auto operated
• Non-computerized
Expenses